Ease the gateway to adulthood with the gift of an investment

Time is a key ingredient in investing, and our dependants are ideally placed to benefit from its magic. Consider starting an investment in your child’s name this Youth Month and ease their gateway to adulthood. Even small amounts compound over time, making a big difference to their choices when they cross the threshold. Odirile Sebolao investigates the options.

Much has been written about compound interest: earning returns today on the returns you earned yesterday, over and above the amounts of money you contribute. But Morgan Housel, partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal, put it magnificently when he wrote recently, that “everything worthwhile in investing comes from compounding. Compounding is the whole secret sauce, the rocket fuel, that creates fortunes.”

Given a long enough period to work, compounding can dramatically multiply the value of your investment, so that less of your total investment will be from your contributions and more from growth. Investing on behalf of your children when they are young, adding to it when you can, and leaving it to grow until they reach adulthood embodies the long-term thinking key to investment success.

What are your options?

There are various products you can invest in on behalf of your children. Two popular options are described below. As always, if you are not certain what the best option is for you and your child, you should talk to a good, independent financial adviser.

Basic unit trust investment
You can invest in unit trusts on behalf of your minor children with a monthly debit order or start with a lump sum. This is a general-purpose investment, with different unit trusts suitable for short-, medium- and long-term investment goals.

Unit trusts provide you with easy and affordable access to financial markets. When you invest, you buy units in unit trusts of your choice. Your money is combined with that of other investors who have bought units in that unit trust. Experienced investment managers use the pool of money to buy shares, property, bonds, cash, or a combination of these, on local or foreign markets, depending on the type of unit trust you choose. How much your investment grows depends on the performance of these assets. You can buy more units whenever you want to, and you can leave the units to grow.

When you invest in a basic unit trust you pay tax on interest, at your marginal tax rate, dividends, taxed at 20%, and capital gains when you withdraw from the unit trust. Forty percent of the capital gain is taxed at your marginal tax rate, but your first R40 000 per year is exempt. You may invest as much as you like and withdraw whenever you need to. When you invest in your minor children’s names you must include the income and capital gains from their investments in your own tax return.

Continue reading: https://www.allangray.co.za/latest-insights/personal-investing/ease-the-gateway-to-adulthood-with-the-gift-of-an-investment/

July 09 2021 By Odirile Sebolao - allangray.co.za Personal Investing